Tuesday, August 19, 2014

Pontificating pundits... Everybody wants to be in shape, but... And notes to self (economic/market update)...

The gists from four panelists on CNBC this afternoon:

1. "It's all about the Fed. There's no wage growth to support any optimism that the U.S. consumer will become a major economic force anytime soon."

2. "Price to earnings ratios will expand to 20 (up 20% from here) and stay there for a long time going forward. This makes for a continuation of the bull market."

3. "Earnings have been all about cost cutting. There's not nearly enough top line growth to support this market going forward. It's all about the Fed."

4. "The prospects for job, and wage, growth is beginning to show up in employer surveys. As this shows up in the real data, the Fed's going to have to rethink present interest rate policy. And that'll be a headwind for the market"

As you can see, the folks the media trots out are kinda all over the place in their assessments of today's economy and stock market. As for my take on the above: I disagree with number one. Number two is possible, but, frankly, it's too arrogant an assumption on two fronts. One: it's an outright market prediction. And two: it requires that interest rates remain very low going forward. I think for this bull market to continue longer-term, we're going to have to see earnings continue to improve, while maintaining P/E's in the mid to high teens.  Number three is basically correct (save for the "it's all about the Fed" part), however, revenue growth was better last quarter, and I like a market that consists of lean companies. I.e., when revenue materializes, a great deal flows to the bottom line. I agree with number four.

Everybody wants to be in shape, but nobody likes the pain it takes to get there:

In recent conversations with clients, I'm sensing an increase in anxiety over a potential near-term correction. I tell these folks that a near-term correction would be a beautiful thing in my estimation. We must never forget that a market is made up of buyers and sellers, who, by nature of the fact that each is either a buyer or a seller, think differently about the present state of the market --- or at least a particular stock or commodity. Aside from the fact that the market needs sellers---which means to keep sellers, sellers are going to have to be right every now and again---without corrections there'd be no correcting. Of course everybody wants to make money in the market. And, clearly, long-term, the market has delivered. But what it requires of those whom it would reward is the willingness to endure the pain of the occasional correcting process (and nobody likes pain). Sometimes it comes in the form of a 10-20% "correction", other times it comes dressed as a bear that'll maul the market by more than 20%. Oh, and by the way, I don't view intelligently rotating between sectors based on valuations and perceived cycles as market-timing...

Here are the highlights from my notes to self over the past few days.

AUGUST 15, 2014

Very good industrial production report today, up .4% vs .3% estimate. That's six consecutive months of gains. 1.0% manufacturing output, largest gain since February. Capacity utilization ticked up .1 to 79.2 for all industries. Still not, overall, into the 80s, which is that inflation-risk zone. However, mining at 89.4 is 2% above its long-term average. Auto production was huge in July. This report strongly supports my opinion that the U.S. economy is finally beginning to look like an economy in recovery...

UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT DISAPPOINTED NOTICEABLY: Which contradicts other indicators, and my own recent assessment that consumer optimism, along with various surveys, conclude that the consumer is coming back strong. My observation over the years is that the stock market tends to noticeably impact this reading. Recent volatility may have influenced the results. Regardless, this particular report does not paint a rosy picture for consumption (and, therefore, GDP) going forward. Which very much supports the Fed's present easy-money posture.

AUGUST 18, 2014

The National Assoc of Home builders/Wells Fargo sentiment index came in at 55 up from 53 and vs a 53 estimate. NAHB Chairman says, "As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market." Builders, while optimistic, continue to harbor concerns over tight lending conditions and shortages of finished lots and labor. The six-month sales outlook component advanced to a one-year high of 65, from 63 in June.

As I suggested to a client this morning, who is considering up-sizing, the now positive trend in employment should foster a pickup in the housing market.

The stock market rallied over 1% today..... apparently on reports that Russia and Ukraine are considering a truce. My eyes are on Eurozone equities---despite the present economic weakness there---as valuations look compelling and we could see a nice bounce on a pickup in sentiment and the beginning of QE from the ECB.

AUGUST 19, 2014

July CPI came in at up .1%, which was at the forecast. Core (ex food/energy), was up .1% as well, which was under the forecast. The Fed's supposed inflation target is 2% annual, which makes today's CPI not a worry for those focused on the first hike in the Fed Funds rate. Besides, CPI is not the Fed's chosen measure. It's PCE (which tracks how folks actually spend their money [they eat more hamburger & chicken when the price of prime rib goes up) that the Fed focuses on, which generally runs somewhat under CPI.

HOUSING STARTS jumped in July at the highest pace in eight months. Which buoys home builders, per yesterday's optimistic sentiment survey results. New home constructions was up 15.7%, or 1.09 million annualized. June's was revised up to 945,000. This makes sense given what I'm seeing in the employment components of most surveys. I.e., folks---notwithstanding last week's consumer sentiment reading---are probably beginning to feel better about the long-term sustainability, and growth, of their wages. Also, there's a large contingent of Chinese buyers moving into select markets, like northern and southern California. This speaks to my long-held view that the trade deficit is an utterly meaningless statistic. The money with which Americans buy Chinese goods always returns to America to either buy goods or assets. When someone from China buys an asset in the U.S., it of course frees up new capital right here in the U.S. It's a very good, and unavoidable, phenomenon.

The stock market rallied again today, as good news (housing) and inflation, turned out to be good news for equities. Had the CPI come in much higher, I suspect we'd have seen the market trade lower, as Fed watchers would've become nervous.


No comments:

Post a Comment